In our Investment Bank Outlook each week, we bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation
Danske Bank
On Brexit, optimism emerged when the Irish PM Varadkar on Thursday said that he now sees a ‘pathway to a deal’. On Friday, the European Commission stated that the EU and the UK have agreed to intensify discussions in coming days. Details are scant, but media speculate that UK PM Johnson no longer insists that Northern Ireland would have to leave the EU custom union, while Varadkar might also has softened his stance. Local media report that the UK and the EU are currently negotiating a deal where Northern Ireland could remain politically part of the EU customs union, but one legally administered by the UK. This might ensure that there would be no need for customs checks on the Island of Ireland (but in the Irish Sea), while allowing Northern Ireland to benefit from trade deals struck by the UK with other countries. The unknowns are whether 1) the UK and the EU will be able to reach a solution during the coming weeks, and 2) the DUP and the hard Brexiteers will support the deal. The chances of PM Johnson securing a deal took a hit on Saturday when DUP deputy leader Nigel Dodds said Northern Ireland would have to remain fully part of the UK customs union.
Recently, we have argued that a Brexit extension and a snap election is the most likely outcome. This remains our view. If we are right, Brexit uncertainty will continue to weigh on European business confidence near-term and EUR/GBP should head back towards 0.90. If we are wrong (I would be happy to be wrong here) and the EU and the UK in fact secure a deal by 31 October, it would be a significant positive for the European economy as it would remove a substantial amount of uncertainty for companies and consumers. It would also support a higher EUR/USD and a lower EUR/GBP (down to around 0.84 in my view). Regardless of the outcome, GBP volatility should remain elevated in the coming weeks. However, in my view other factors are at play in driving markets, which often fly under the radar. China’s business cycle appears to be stabilising. This is slightly earlier than we had expected given the escalation of the trade war in August, but likely reflects a combination of infrastructure investments, residential construction and the weakening of the renminbi. China is driving the global manufacturing cycle. A Chinese stabilisation now should provide some support for the Eurozone cycle towards the end of the year.
Wells Fargo
Backlash Building? Not only did formal trade negotiations resume this week, but a couple of other China stories grabbed our attention. First, we had China banning South Park (ironically) for mocking the US entertainment industry’s appeasement of Chinese censors. Second, we saw the NBA bend over backwards to quash criticism of China’s actions in Hong Kong. These events could have a substantial political impact – and ultimately we think could help President Trump once the average person begins to understand how heavy-handed the Chinese administration can be.
China & Capital Flows. In recent weeks, there’s been significant talk about placing capital controls on Chinese investments. The potential options range from delisting ADRs to excluding Chinese investments from indices and public pension funds. We do not expect to see any de-listings of Chinese firms as it would set a very poor precedent. However, should Chinese humanitarian and civil rights abuses come into greater focus, the country could run the risk of becoming this decade’s South Africa (i.e., non-investable) for public pension funds and the ESG community. The volatility surrounding capital controls is not limited to equities. Several Chinese convert issues have experienced excessive volatility including Pinduoduo (PDD), a $37B market cap company. Our convert desk believes the discussion will limit new Chinese issuance for some time. This is notable because Chines issuers have been upward of 10% of new convert issuance.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!